In our previous blog, we took a look at the demographic realities affecting the financial health of pension systems across the U.S. While these aren’t the only factors that impact the stability of these retirement plans, they are major contributors.
TL;DR? Here you go: People are living longer, which is awesome for all of us individually, but not so awesome for retirement plans that have to pay out monthly incomes on those additional years. Compounding this further is the fact that people are also having fewer kids, which means fewer people are entering into and contributing to pension plans to compensate for those receiving a longer payout in retirement.
As a result, the Colorado Public Employees' Retirement Association (PERA) and other defined benefit plans across the country are having to introduce reforms (with varying degrees of success)—or dismantle altogether. Lucky for us, the Board of Trustees at Colorado PERA is being proactive in its approach, putting forth a recommended package of changes to the plan before it's in dire straits. The PERA Board’s recommendation will be presented to the Colorado legislature sometime in the next month, and, if passed as written, will go into effect in early 2020.
If you’re a current PERA member (meaning that you pay in and have access to PERA through your employer), here is a high-level overview of the ways in which your benefit might change:
At the end of the day, the goal is to decrease the amortization period—the amount of time it takes for the plan to reach full funding—to 30 years. What’s so important about that? Well, when a pension plan is fully funded, it’s able to pay all that it owes to both current retirees and future retirees FOR-EV-ER (does anyone else picture this classic scene from The Sandlot when we say that?). Right now, the amortization periods for PERA’s two largest divisions, State and School, are 58 years and 78 years respectively. So yeah…not exactly 30 years. This doesn’t mean that PERA can’t pay all the money it owes to its current and future retirees; it can. But, these longer timeframes increase the risk of another 2008 financial crisis befalling us—and if that were to happen, PERA might not be able to bounce back. That’s why the PERA Board is opting to address the plan’s funding issues now before we're in an actual crisis.
We’ll be sure to keep you apprised of any changes to Colorado PERA as they unfold. If you’re jonesin’ for some real time legislative updates though, feel free to check out our sister blog, PERA on the Issues. And, if you have any questions about the benefit you receive through PERA currently, you can give the friendly folks in Customer Service a call at 1-800-759-7372.
That’s a wrap for January’s “Pensions 101” series. Up next for February, we’ll delve into the exciting world of defined contribution plans (a.k.a. 401(k)s). Don’t get too excited…